Personal checks are used by many people that are not able or willing to pay by other means, such as with currency. Unfortunately, many people are unwilling to accept personal checks because of the possibility that the check will not clear and thus payment will not be received. For example, the check may be written for an amount that exceeds the available balance of the financial account on which the check is drawn. The check may also be drawn on a financial account that has been closed or is otherwise inactive. Consequently, many people who would like to pay using a personal check are not allowed to do so, even if their check would clear.
U.S. Pat. No. 5,703,344 to Bezy et al. describes a real-time point-of-transaction funds confirmation system in which a draft presented by a payor to a payee is confirmed against the account on which the draft is drawn. A bank number and account number are printed on the face of the draft in a machine-readable format, usually in the form of a line of magnetic ink computer readable digits and punctuation (a "MICR line").
In the system of the '344 patent, the merchant scans the MICR line of the draft using a MICR line reader, and enters the amount of the draft manually or automatically via a cash register. A request record is generated therefrom and transmitted to a payor bank. The payor bank in turn secures a hold on funds from the account or generates an effective hold, and returns a response record to the merchant. Following receipt of the response record, the merchant accepts or rejects the transaction. The prudent merchant will reject a rejected transaction at this point or request other security. A hold is removed when a draft corresponding to the hold is presented for clearing.
The system described by the '344 patent suffers from several drawbacks. The real-time system verifies whether there are insufficient funds at the time of the transaction. Unfortunately, many people do not know precisely how much funds they have available in their account. Such people can be embarrassed at the time of the transaction to find that their draft is not accepted due to insufficient funds.
The above-referenced system requires specialized apparatus, such as the MICR line reader. The requirement for specialized apparatus limits the number of merchants that may perform the above-described process of the '344 patent to those that are willing and able to purchase and install such apparatus. In addition, the apparatus may break or otherwise fail to operate properly.
Another drawback of the system of the '344 patent is that the payee controls the amount of funds which are secured. This may not always be desirable, especially when the payee is not a trusted merchant. For example, a payor may wish to conduct a single transaction with a party he has never met, such as someone selling goods by telephone or on the Internet.
Furthermore, the system of the '344 patent secures a hold on funds at the time of the transaction. Such a limitation is not desirable for transactions that do not occur in "real time", such as checks that are mailed to a payee.
Another drawback is that an unscrupulous party may unilaterally secure any amount of funds if he has possession of stolen drafts. Such a party may secure an amount of funds equal to the entire available balance of the financial account.
U.S. Pat. No. 4,630,201 to White describes a system utilizing a smart card and a portable transaction device. The smart card stores an account number, account balance and secret password. The portable transaction device allows checks to be written against the balance stored on the smart card, and can be used to receive money transfers from the bank into the account balance stored in the card. Transactions can thus be carried out in an off-line manner and be subject to later verification at a central processing unit of the bank. However, the transaction device requires an on-line connection when funds are transferred from the bank to replenish the account balance in the card.
A central processor of the bank generates a table of random numbers which are associated with a sequence of transaction numbers. The sequence of transaction numbers are equivalent to successive check numbers. The set of random numbers and the associated check numbers are supplied to storage means at the portable transaction device.
When a check is to be written, the customer enters into the transaction device a parameter associated with the transaction, preferably the transaction amount. If the amount in the stored account balance is sufficient to cover the check, the account balance is debited and the transaction allowed to proceed. However, if the account balance is insufficient, the transaction will be halted. The customer will be required to transfer funds from his bank account to the card in an on-line manner.
The transaction device determines the random number associated with the next available check number and combines data representative of that random number with the transaction amount using an algorithmic encryption technique. The resulting output defines a security code which is associated with the check. The security code can be printed on the check.
When the check reaches the bank, its authenticity is verified by the central processor. If so, the transaction can be authorized and the check paid. The merchant may verify the authenticity and value of the check at the time it is presented. The bank can immediately verify the security code for the merchant thereby guaranteeing the check.
The system described by the '201 patent suffer from several drawbacks. Since the system is for writing checks drawn on a balance stored in a smart card, it is inapplicable to normal checking accounts, which are more widely used than smart cards. By one estimate, checks accounted for approximately 62 trillion transactions in 1995 alone, and half of all households in the U.S. use checks. The system of the '201 patent also requires specialized hardware, including the smart card and the portable transaction device. Such a requirement has hindered the acceptance of smart cards.
Furthermore, since smart cards store an account balance, even the most secure smart cards are susceptible to fraud and tampering, especially by skilled hardware and cryptography practitioners. For example, as described in an article entitled "Code Breaker Cracks Smart Cards' Digital Safe" on page 1 of The New York Times, Jun. 22, 1998, a four-man consulting firm has employed personal computers and several thousand dollars of electronics equipment to crack the latest versions of smart cards. Through tampering, the card balance could be increased. Worse, the balance could be increased and many checks could be written, each for the entire stored balance. The '201 patent does not describe a manner to protect against such a security compromise, nor does it describe a manner to permit merchants to verify that checks remain guaranteed after such a compromise in security. It is undesirable for a bank to be isolated from transactions since they are then unable to maintain security over the financial data of their accounts. Another drawback of smart cards in general is that they may be lost or damaged, preventing the stored balance from being used.
It would be advantageous to provide a method and apparatus for processing checks that reduced or eliminated some of the above-described drawbacks.